Virtualization company VMware has announced plans to buy Nicira Inc. for $1.26 billion.

Nicira is prominent for its software defined networking (SDN) virtualization technology, and VMware's bid for the company potentially represents its largest acquisition to date. The deal marks a strategic move for VMware, which has made no secret of its plan to extend its core focus of server and storage virtualization to automating datacenters and cloud services, including network resources. Nicira, which released its flagship Network Virtualization Platform (NVP) last year, is regarded as a pioneer in bringing software-based network virtualization to market.

Some of the largest cloud providers, carriers, government agencies and enterprises have deployed NVP, including AT&T, eBay, Fidelity Investments, NTT and Rackspace Hosting. Nicira was founded in 2007 by Stanford University PhD graduate Martin Casado and Stanford Professor Nick McKeown, along with University of California at Berkeley professor Scott Shenker.

Nicira has positioned its SDN technology as doing for networking what traditional virtualization has done for computing. NVP is based on Open vSwitch, an Apache 2 license open source standard designed to enable "massive" network automation though software interfaces, including OpenFlow. It's used to virtualize switches and related hardware.

"Virtual networks can be created, grown, moved, and dynamically configured on demand without touching or configuring the hardware," explained Martin Casado, CTO and one of Nicira's founders. Casado made the statement in an interview with Virtualization Review blogger David Davis that was published earlier this month. As a PhD candidate at Stanford, Casado also invented the OpenFlow switching specification now supported by Cisco Systems, Facebook, Google, Hewlett-Packard Co., Intel, Juniper Networks and NEC, among others.

The Nicira software runs on industry-standard x86 servers and works with major hypervisors. VMware officials pledged to maintain Nicira's heterogeneous support. VMware CTO Steve Herrod said in a blog post that Nicira will continue to support multiple hypervisors and cloud platforms.

"We are absolutely committed to maintaining Nicira's openness and bringing additional value and choices to the OpenStack, CloudStack and other cloud-related communities," Herrod noted.

VMware's intention is to extend its virtualization technology to cover full network and datacenter automation. That point was stressed last week in announcing that VMware CEO Paul Maritz would assume the chief strategy role at VMware parent company EMC. Pat Gelsinger, EMC's Information Infrastructure Products President and COO, will take over as VMware's CEO on the transition date of September 1.

On an investor call last week announcing the management shakeup, EMC's CEO Joe Tucci argued that "the time to make these changes is from a position of strength." For now, that appears to be the case, as VMware on Monday announced record second-quarter revenue of $1.12 billion, an increase of 22 percent over the same period last year.

Speaking to analysts on VMware's earnings call on Monday, Maritz likened VMware's move into network virtualization to the early days of server virtualization. "By turning physical servers into software entities, we were able to transform sever automation and provisioning," Maritz said, explaining the company will look to stake similar leadership in network virtualization and datacenter automation.

To be sure, this technology today is suited for the largest of infrastructures and it could be years before it becomes mainstream.

"With the acquisition of Nicira, VMware becomes well positioned to provide virtual network functionality not just in the context of vCloud and vSphere but to be able to provide it to other heterogeneous non-vSphere-based pools of infrastructure as well so this represents a deepening and a broadening of our strategy," Maritz added.

Analysts on the earnings call questioned the premium VMware is paying for Nicira but Maritz defended the large cash outlay.

"We saw tremendous strategic value in being able to claim a position of leadership as we move into these new phases of the software-defined data center," he said. "So obviously, given the size of the price tag, we believe that this is of the utmost strategic importance going forward. We believe it was a somewhat unique asset and we believe that this is going to strengthen our competitive position."

The deal is a coup for Netscape founders and VC investors Marc Andreessen and Ben Horowitz, who invested $17 million of the $50 million raised by Nicira. Andreessen told Forbes the deal was "one of the largest all-cash acquisitions of a private tech company." The breakdown includes $1.05 billion in cash and approximately $210 million in assumed unvested equity awards, VMware said.

The deal, approved by the boards of both companies, is set to close by the end of this year.

About the Author

Jeffrey Schwartz is editor of Redmond magazine and also covers cloud computing for Virtualization Review's Cloud Report. In addition, he writes the Channeling the Cloud column for Redmond Channel Partner. Follow him on Twitter @JeffreySchwartz.